Is CAPM A Good Predictor Of Stock Return In The Nigerian Commercial Services, Hotel And Tourism Stocks?

Abstract

This research is on testing the predictive power of Capital Asset Pricing Model (CAPM) as enunciated by Sharpe (1964) in the determination of the required rates of return of Nigerian Commercial services, hotel and tourism sectors stocks that coincides with the actual rates of return. As it were, there is no clear cut understanding on the belief with particular reference to Nigerian Commercial services, hotel and tourism sectors stocks. In the light of the above assertion, the objective of this study is to find out the required rate of return of Nigerian Commercial services, hotel and tourism sectors stocks from 2000-2012 and compare them with the actual rates of return in the corresponding periods to indentify the valuation status of the stocks. Being an empirical study, analytical research design was adopted. The data used were secondary data, which were collected from the financial statements of the firms, The Nigerian Stock Exchange publications, and Central banks of Nigeria publications. The findings show that the Capital Asset Pricing Model (CAPM) as enunciated by Sharpe (1964) did not give any appropriate forecast of the returns from the Commercial services, hotel and tourism sectors stocks throughout the thirteen-year period of study. The CAPM made nine under-valuations and seventeen overvaluations to make a total of twenty-six misappropriations in the thirteen years period of study in the Commercial services sector and five under-valuations and twelve overvaluations to make a total of seventeen misappropriations in the hotel and tourism sector. Therefore, the Capital Asset Pricing Model (CAPM) is not a good predictor of stock return in the Commercial services, hotel and tourism sectors of the Nigerian Stock Exchange.

Keywords: historical equity market risk premium, historical equity beta, required rate of return to equity, actual market return, actual stock return.